1. Try to work out what is happening
A ‘compliance check’ is the general term HMRC uses for their investigations. ‘Compliance checks’ can take place at any time but will only be carried out when HMRC has identified a risk or when a check is required as part of HMRC's random programme.
HMRC will phone or write to you to tell you that they have started a check. If HMRC phone, listen carefully to what they say, and write down everything you can. You do not have to answer any questions there and then. The HMRC officer dealing with the check should tell you what they are checking, and why; and what information or documents they need from you, and when. If you don’t understand why HMRC is asking a particular question, ask them why they are asking it.
An ‘enquiry’ is a particular type of ‘compliance check’. An ‘enquiry’ can only be into a tax return so it can only take place once a tax return has been filed. An enquiry will always start with a written notification. The enquiry notice will explain what HMRC are looking into. It may be an aspect of the tax return or it may be the whole thing. You will probably be asked for further information and documents.
2. Don't ignore any notification of a compliance check
HMRC has the right to make enquiries into your, or your business's, tax affairs. HMRC do not go away if you just ignore them.
3. Don’t panic
While you should take any tax enquiry seriously, panicking won’t help. A tax enquiry is never going to be a pleasant experience even if your tax return is complete and correct. But it is not the end of the world. If there is nothing wrong with your tax affairs you have little to fear. We live in a civilised country where, despite hysterical newspaper reports to the contrary, justice is nearly always done. In Russia the Tax Police used to turn up armed with AK-47 assault rifles.
4. Don't destroy the evidence
If you start getting rid of documents HMRC will assume that you've something to hide. If you didn't keep records, obtain replacements (such as bank statements). This can often be done easily and cheaply by way of a request under the Data Protection Act 1998.
5. If you think there might be anything wrong with your tax affairs, seek professional advice immediately
Other than random checks, which are a small minority of the checks they do, HMRC rarely go on ‘fishing expeditions’. Before you get any notification of a compliance check HMRC will have reviewed any tax returns you have filed. They will have researched their ‘data warehouse’ for background information on any property, other assets, and interest bearing bank accounts you hold. They may also have information from other countries about assets held in your name, or for your benefit, there. So be honest with yourself. Is your tax return 100% correct? And can you prove it?
We all outsource aspects of our lives to specialists, and tax investigations are no different. For example, if you run a business you may get a bookkeeper to do your books. You may have an accountant to do your accounts. You might even have a tax specialist (perhaps a Chartered Tax Adviser) to do your tax return. In the same way you should get a tax enquiry specialist (a Chartered Tax Adviser or a former Inspector of Taxes working for a firm of accountants or solicitors) to deal with any compliance check.
You should consider calling a solicitor specialising in tax disputes to advise on anything that might involve a dispute in the Tax Tribunal and especially anything involving HMRC's 'specialist investigations' teams (serious avoidance and evasion, sometimes known as COP8 and COP9). This is where the protection of legal privilege in terms of your communications with your adviser can be important.
You should always ask a solicitor to assist you if HMRC turn up with a warrant; or ask to interview you 'under caution'; or allege fraud on your part.
6. Be honest with HMRC
Never lie in response to a question from HMRC. Never tell HMRC half-truths or disclose only half of a relevant chain of correspondence. Remember communications with your accountant are rarely covered by legal privilege- so HMRC can force them to provide copies of every email and file note.
If your tax enquiry specialist tells you there is something wrong with your tax affairs you will get credit for disclosing it early. Even if there is something very seriously wrong, disclosure (in the right way) is the best option. People often get prosecuted for the cover-up, not the crime.
George Gillham is a partner specialising in tax disputes. He can be contacted at firstname.lastname@example.org and on 020 7861 4059.